Signs of US Default Jitters Emerge

Video: http://video.cnbc.com/gallery/?video=3000025127

Wed 01 Jun 11 | 07:00 AM ET

Transcript: concerns over a possible u.s. default seen in the credit default swaps market. joining us with more, roger altman and david greenlaw. guys, good morning to both of you. good morning. good morning. roger, so we got this theater going on in washington. with the ten-year at 310 should we be watching the spreads? i think the action in the credit default swap market is meeting full even though we know that liq liquidity in the marke showing as the wall street journal shows this morning is beginning of concern especially in the very short end of the treasury market over the possibility that we'll somehow fumble the ball at the last second and there could be a default. do i think there will be a default? no. is it impossible? no, it is not impossible because you could have some sort of last-second slip-up like we saw on the first vote for the t.a.r.p. in the fall of '08 when you all remember how that worked. bad day. that was a bad day. and i think this fight over the debt limit which over the next two months is going to be extremely bloody and will go to the edge and there's a risk that unintentionally you fall off. going to the edge, david, is how we tend to legislate in this country. is this real fear or a hedge? is this guys trying to hedge the bets? i think it's a little bit difficult to look at the credit default swap market to gauge the probability of default. the payoff is so small as long as the default doesn't last too long. i think as we get closer you are more likely to see market volatility rise, more likely to see some steepening of the yield curve because i think there's a chance of short-term extensions to the debt ceiling much as the continuing resolution and that could cause some disruption in the market. does short term financing seize up ahead of this? and if so, when? how far in advance of the actual deadline? i don't think there will be a difficulty on the part of the treasury for securities until right up to the deadline. so, you will have the market continuing to take down the debt but we may have a little bit more volatility around the auctions as the market tries to go through some price discovery to figure out the demand is going to be for those securities. even deadline and pass the deadline there could be some hesitation on investors' part? sure. all you need is one somewhat credible rumor that a large investor is nervous. right. and is prepared to pull back from the market. if you get some signals from a large, important investor along those lines you could certainly have market reaction ahead of the point at which we get down to the wire. which by most estimates is early to mid-august. ronlger? becky, i don't think there's a doubt of what david just said. if you assume as most people do that this is going to go right to the edge, literally perhaps to the last hour and a half as we saw during the near government shutdown of two or three months ago, of course, there's going to be market disruption. it may not manifest itself in the cash market until the last few days before the edge of the cliff but there will be disruption. what happens after if you get pushed into a situation and seven, 14 days, something like that if you get passed that deadline? i'm one of those that thinks if we should somehow fumble the ball and default, that's catastrophic. it's catastrophic because, yes, of course, we'll cure the problem as you say a few days later or a week or two. although i doubt for more than a day or two but the impact on the buyer universe for treasuries i think would be quite meaningful. there are lots and lots of institutions in this country and around the world who would cut back or even stop their buying of treasuries if we had actually defaulted. remember, the united states has never defaulted since the founding of the republic in 1789 and it's not a kind of whoops we didn't mean it type of thing. it's just not that type of thing. where would they go? where would china start to recycle their dollars? they're not going to turn to greek debt all of a sudden, right? maybe they will, go to portugal debt ivan kooufr real estate. how come he's so different with so much money on the line, roger, how come he thinks so differently? anybody who sells after that and then when a deal is done, buy back in at much higher prices after they sell at the bottom? the more you -- wouldn't you like something to be done and wouldn't you like this to be a moment that caused our long-term prospects for the bonds to get much stronger by cutting spending or are you just -- you know, the people that say that the world's going to end they want to do it. they don't want any spending constraints put on board. do this first. we'll talk about it later and then never talked about later. guys, hold on. let's step back in the spirit of joe's question for a minute. this whole situation is short-term bad news and long-term good news. the bad news is the struggle's going to be bloody. the good news is that the entire atmosphere in washington on deficits and debt has changed. and if we were on this show six months ago or nine months ago, we would have been saying to ourselves, they don't get it in washington because look at the path on deficits, look at the path on debt. we are headed to debt equal to 100% of gdp and no solution in sight. now we are going to see in the context of this debt limit fight a major spending -- excuse me, deficit reduction bill, deficit reduction agreement in order to get the votes to pass the debt limit. authored by whom? the gang of six? biden commission? well, i think it will ultimately be of course the entire congress as we saw in the nominal $38 billion cut in the 2011 budget to avoid the government shutdown. in other words, it would ult fatly get to the point of everybody. we get medicare reform at some point. the question is whether we get it now as part of a debt ceiling agreement or 2012 election as part of a deal to extend or change the tax cuts to expire after the 2012 election so i think most people felt, most washington experts felt there wouldn't be serious deficit reduction until we got passed that 2012 election and now could be brought forward and getting medicare reform and longer budget tear changes at some point. i still sense that it's probably going to be smoke and mirrors to get through the debt ceiling crisis this time. we'll get unspecified cuts over an undetermined time frame with ineffective triggers. more triggers involved and we could get something as we go down. the way brinkmanship works, roger, if no one really believes it can happen then you don't get any concessions and more people saying the world will end the more people saying it will never really happen and don't need to do anything and raise it no matter what. i have a slightly different view than david's. i think there will be a serious chunk of deficit reduction done now, agreed now, in order to get the votes to pass the debt limit. will it be perfect? no. will it be a major step to the $4 trillion 10-year total we need? i think it will be a major step and that's a complete change from what we as i said were thinking six or nine months ago. continuing resolution, it was really smoke and mirrors. it was sold as a $40 billion spending cut for this year and cbo estimated less than $1 billion of spending cuts for the year. do you think as we get closer to the moment of truth on this, the uncertainty, the fear bleeds into commercial finance? consumer loans? does it -- if i want a mortgage in the 72 hours prior to the deadline, will i have a problem? i think that's a stress. the emphasis on the coupon payment. the social security checks on august 2nd may also be in some jeopardy. and i think that's where really the focus will be. i doubt that it will spreads to other markets until you get passed that point. that is showing up in the credit default swap spreads because the widening out of the spreads has been on the short end of the treasury curve. not the longer end which shows as david just said over for example the one-year and not the five and ten-year seeing to real change in the cds. we are getting viewers writing in, roger, when fdr reneged on the gold certificates there were some technical defaults of the u.s. and happened before and semantics of an actual demalt fault is. i'm talking about a failure to meet an interest or principal payment when it's due. you are hawkish on the deficit, roger. i don't know why you think that some of your colleagues on the democratic side of things are not as serious as you are about whether there's -- i think everybody thinks it will be done no matter what. we don't need to play ball here. one of the things that really changed the atmosphere, joe, as we both know and let's give them credit was the simpson-bowles report and the fact they ended up getting a majority of that commission to vote for it. and that report which i recommend to everybody is really quite profound. i think it began to change this debate and the momentum of deficits and debt reduction and debt and reducing them. that's good. simpson-bowles was established as part of the last agreement to hike the debt ceiling. allowed both parties to come together. at least we took all of their recommendations very seriously. that worked out. thanks, guys. interesting stuff. a fun summer. thanks a lot.